Cost-benefit analysis decisions

Covernment and regulatoi y decisions. Sometimes these decisions are based on some type of quantitative risk analysis, and they provide some guidance on society s expectations with regard to risk management. In some cases these decisions will also include some kind of cost-benefit analysis. The current political climate in the United States may encourage more extensive use of risk analysis in the establishment of future regulations. 

In order to associate a number to represent the utility of these four outcomes we have to choose between several types of economic evaluations, basically between cost-effectiveness analysis, cost-utility analysis and cost-benefit analysis. The first of these is ruled out because it measures the health outcome in natural units. Given that the side effects of drags are of a varied nature, we need to be able to aggregate the different seriousness of these side effects in order to obtain a single utility, at least for the NSEA event. Furthermore, this utility must be comparable with that of, for example, the SER event. This is not possible with cost-effectivity. If we chose cost-utility, the utility associated with each event would be measured in QALYs gained or lost in each option. As QALYs are a universal measure of health benefit, cost-utility analysis could be appropriate for this type of decision. Lastly, cost-benefit analysis would also be appropriate, as it measures the utilities associated with each outcome in monetary terms, which reflect the willingness to pay for one of the outcomes in terms of safety and effectiveness. 

In a cost-benefit analysis, both costs and consequences are valued in dollars and the ratio of cost to benefit (or more commonly benefit to cost) is computed. Cost-benefit analysis has been used for many years to assess the value of investing in a number of different opportunities, including investments (or expenditure) for health care services. Cost-effectiveness analysis attempts to overcome (or avoid) the difficulties in cost-benefit analysis of valuing health outcomes in dollars by using nonmonetary outcomes such as life-years saved or percentage change in biomarkers like serum cholesterol levels. Cost-minimization analysis is a special case of cost-effectiveness analysis in which the outcomes are considered to be identical or clinically equivalent. In this case, the analysis defaults to selecting the lowest-cost treatment alternative. Cost-utility analysis is another special case of cost-effectiveness analysis in which the value of the outcome is adjusted for differences in patients preferences (utilities) for the outcomes. Cost-utility analyses are most appropriate when quality of life is a very important consideration in the therapeutic decision. 

Qualitative findings of ecosystem risk assessments are of low utility for risk management. They cannot be compared with quantitative estimates of other risks this compromises the ability of risk ranking to provide insights to setting priorities. It is particularly difficult to convert them into a format applicable for cost-benefit analysis, which is a key tool that any proponent uses in decision-making on a proposed project. 

Decision analysis provides a formal theory for choosing among alternatives whose consequences are uncertain. The key idea in decision analysis is the use of judgmental probability as a general way to quantify uncertainty. Decision analysis has been widely taught and practiced in the business community for more than a decade (2 -4). It provides a natural way to extend cost-benefit analysis to include uncertainty. 

This paper will summarize briefly some work my colleagues and I at Decision Focus Incorporated have carried out for EPA to show how decision analysis might be used to assist decision making under TSCA ( 5). I will first briefly review the concepts of quantitative risk assessment and cost-benefit analysis to show how decision analysis fits with these concepts and provides a natural way of extending them. Then I will illustrate the approach using a case study on a specific chemical, perchloroethylene. 

Cost-benefit analysis is a useful analytical tool that in many cases can help decision makers to know what factors are involved in a decision and in some cases can give the decision maker some idea of the relative importance of the factors. It cannot do more than that in the realm of policy making. 

Ideal, which some of us are not comfortable assuming. It ignores certain essential aspects of decisions, such as who will bear the oosts and who will gain the benefits, which cannot and should not be ignored. Its results are in most cases determined by assumptions which are inherently somewhat arbitrary, such as what discount rate is used. And finally, for the kinds of public health decisions discussed in this paper, there is never enough information to provide the kinds of numbers needed for cost-benefit analysis. 

The use of cost-benefit analysis plays an important role in the decision-making process for fire protection systems. A cost-benefit analysis sums the expected benefits and is divided by the sum of the expected costs. A challenge often lies in determining what "expected" means and estimating the value of money over the time period the fire protection is in use. In fire protection, the expected benefits can be defined as the difference between the cost of a loss without protection and the cost of a loss with protection. The exported costs include the initial costs of the fire protection as well as any annual testing and maintenance costs. The likelihood of an incident is factored in to obtain residual risk. This residual risk is compared to the benefit to determine what benefit is available each year versus the annualized cost. 

Chapter 9, Psychopharmacology and Health Economics, authored by Dr Ed Snyder, explains the principles of pharmacoeconomics and its applications in psychopharmacology. Readers will find a clear statement of the methodology employed in this still developing field which is of immense importance to day. Major decisions which affect the availability of psychotropic drugs and clinical decisions by individual practitioners are often based on poorly informed concepts of cost-benefit analysis. This chapter will greatly increase the sophistication of many readers on this topic. 

Finally, not to overemphasize the role of economics in making decisions on issues such as those surrounding the DRRA, it may be that economics can and should play only a small part in these decisions. That is, perhaps such decisions should be based primarily on social grounds. Too much appears to be expected of economic analysis, particularly cost-benefit analysis. Normally only parts of a problem and alternatives to solving it are amenable to economic analysis. We should not expect more regardless of the recent surge in demands for economic impact analysis. 

Environmental Impact Assessment (EIA) has evolved as a comprehensive approach to project evaluation, in which environmental factors, as well as economic and technical considerations (e.g. Cost Benefit Analysis), are given appropriate consideration in the decisionmaking process. The purpose of an EIA study is to determine the potential environmental, social and health effects of a proposed development. It attempts to define and assess the physical, biological and socio-economic effects, so that logical and rational decisions are made. The identification of possible alternative sites and/or processes may assist in the reduction of potential adverse impacts. 

Cost-benefit analysis A quantitative evaluation and decision-making technique where comparisons are made between the costs of a proposed regulatory action on the use of a substance or chemical with the overall benefits to society of the proposed action often converting both the estimated costs and benefits into health and monetary units. 

The fourth core element, the maximin principle, could partly be said to relate to the no data, no market-element , since this in principle prevents the marketing of a chemical rather than the opposite in case of uncertainty. However, this point refers to data gathering activities and not to decision-making on the basis of uncertain data. On the latter point, no provision in REACH explicitly recognises or implements the maximin principle, not even under the restriction tide. On the contrary, traditional cost-benefit analysis plays a central role in the authorisation and restriction procedures. 

The fourth core element, the maximin principle, is not implemented at all. On the contrary, there is a strong reliance in TSCA and in the implementation of the act on formal risk assessments and cost-benefit analysis, which more or less completely blocks complementary approaches, such as decision-making aiming at reducing the likelihood of the worst case becoming a reality. 

Cost-effectiveness and cost-benefit analyses are frequently mentioned in academic and policy-analysis circles. These notions center on careful examination of the costs and their corresponding outputs. Eisenberg defines cost-effectiveness analysis as the measure of the net cost of providing service (expenditures minus savings) as well as the results obtained (e.g., clinical results measured singly or a series of results measured on some scale). Cost-benefit analysis determines whether the cost is worth the benefits by measuring both in the same units. Such analyses will be critical, as future policy decisions are made with regard to the collection, allocation, and utilization of finite resources in the health care system for the enhancement of health status of the American people. 

This may be viewed as a simplified or incomplete cost-benefit analysis. Only some of the benefits are expressed in monetary terms. Those that are most difficult to quantify in this way (e.g. decreased mortality), are expressed in other units. The final balancing of risks and benefits is left to the decision maker. 

Risk management is the decision-making process that follows the completion of a risk assessment. The risk assessment provides important information that supports decision-making and is integrated with other factors, including economic, feasibility, and cost-benefit analysis, in the risk management process. 

Cost/Benefit Analysis Since any change or modification in the process requires additional capital, operation, and maintenance cost, a cost analysis must be included to help management make informed decisions. These factors may include cost avoidance, enhanced productivity, and decreased liability risks from the pollution prevention effort. Federal and state agencies have provided matching grants to small industries to implement source reduction programs. 

The underlying premise of pharmacoeconomic analyses is that fiscal resources are scarce and that there is a need to make decisions based on the relative value of different interventions in creating better health and/or longer life. There are five main analytical techniques used to evaluate the incremental value of products. These are cost-consequence analysis (CCA) cost-effectiveness analysis (CEA) cost-benefit analysis (CBA) cost-minimisation analysis (CMA) and cost-utility analysis (CUA). Although the identification and valuation of the cost component (numerator) of these analyses are similar, it is the identification and valuation of the consequences (denominator) that truly differentiate these analytic techniques. A brief description of each of these techniques follows. 

The common elements of cost-benefit analysis are applicable to all areas. There are four main stages identification, classification, quantification, and presentation. Each of these stages presents its unique problems to the analyst, especially since the work of various participants and disciplines in a project must be combined. ( ) In the health, safety and environmental area, quantification of health and human welfare benefits has proved to be an especially controversial topic.( ) Nevertheless, it is worthwhile to consider the application of cost-benefit analysis to regulation in that area in order to improve the quality of regulatory decisions, and to introduce discipline and rigor in the making of those decisions. 

The writer is indebted to Mr. T. H. Rhodes who conducted this analysis. And cf. Michael S. Baram, "Cost-Benefit Analysis An Inadequate Basis for Health, Safety and Environmental Decision-Making" Ecology Law Quarterly pp.473-531 (1980), Footnote 1. ... 

Nicholas A. Ashford, "The Limits of Cost-Benefit Analysis in Regulatory Decisions, Technology Review pp.70-72, May 1980. And cf. M. S. Baram, loc. cit. 

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